Since the 1990s, major transport operators have introduced yield management systems initially inspired by the airlines.
The principle is simple: maximize turnover to sell the right product to the right customer at the right time for the right price. This result in some unpredictability in order to influence consumer behavior according to its degree of anticipation to buy its ticket.
However behind those simple principles, operators have created very complex reservation systems. Tyms has developed a number of tools capable of interpreting them.
Understanding pricing strategy of your competitor is a decisive advantage that Tyms can provide you
To illustrate the operating principle of yield management, let’s take an example. Take the case
a train whose tickets are sold at one price only. Given the capacity to pay customers, we can assume that if this single fare is set at 100€, 50 people are willing to pay this price (case A). If the single fare is set at 30€ (case B), 325 people will be ready to pay.
With this example, we can see that the revenue of case A is 5 000€ while it is 9 750€ for case B. The revenue management system goal is to go beyond 9 750€ by segmenting the market so as to go for each niche of customers, as far as possible, to their highest willingness to pay (WTP).
To achieve this, rail or air operators fares are varying in real time for one same journey and comfort class. Thanks to a judicious segmentation of a market, operators can sell for example 45 tickets at 100€, 100 tickets at 40€ and 180 at 30€ for a revenue of 13 900€ (325 passengers).
Revenue management success consists precisely in segmenting with subtlety the market
This technique of maximizing the revenue is based on the existence of differentiated elasticity rates, variables and evolving over time according to the levels of consumer incomes (market segmentation), but also according to the people, their practices, their perceptions, their geographical location or their need for travel (« captive » travelers or commuting with no alternative transportation).
By opening lower prices levels, care must be taken to avoid the highest WTP customers to go to lower fares and benefit from a windfall gain. Operators have widely built their quotas and segmentation on the level of anticipation to purchase the ticket, coupled with a differenciation of flexibility (possibility of exchange and repayment). To work perfectly, yield management structurally needs unpredictability : revenue management success relies on the fact that the customers prefers to buy now because they anticipate that the price is going to grow, and have the feel that there is a real risk not to buy right now.
Overall, yield management allows a win-win system: by looking for the highest willingness to pay, it makes it possible to also offer lower prices and therefore to open the seats to travelers who could not pay a price more high, while generating a better revenue than with fixed and static fares.
Yield management is thus an interesting tool to enable more people to travel.
Tyms has a real business knowledge and translate the different reservation systems in clear useful data. Thanks to our tools, you definitively have a head start to understand and decipher the strategy of your competitors